When Is Mortgage Insurance Tax Deductible on Rental Property?
Mortgage insurance premiums on a rental property are tax deductible in the year that they were paid. However, if multiple years of premiums are prepaid all at once, the only portion that can be deducted is the premium payment that applies to the given tax year. Deductions for mortgage insurance premiums should be reported on line nine of Schedule E, "Supplemental Income and Loss," which is also known as Form 1040.
Example Calculation of Deductible Mortgage Insurance Premiums
If you have a mortgage insurance policy on a rental property and pay the premiums as they come due, you can deduct a full year's worth of payments if you paid the premiums over the entire 12-month period. For example, if you paid $100 a month for each month from January through December, you would be entitled to deduct $1,200 on your Schedule E (12 x $100 = $1,200).
However, when you actually begin paying the premiums throughout the year and how much you have prepaid in total determines how much you can deduct. For example, assume that you have taken out an 84-month mortgage on your rental property. Assume that you prepaid the entire mortgage insurance policy in advance at a price of $9,200. Next, assume that you took out the mortgage and paid the insurance premiums beginning in April of that year. To calculate the amount you are allowed to deduct in that first year, you first need to spread the cost of the entire insurance policy over the 84 months and then multiply by the number of months paid in the first year. In this example, the amount you can deduct in the first year is:
Deduction allowed = ($9,200 / 84) x 9 = $109.52 x 9 = $985.71